TUPE explained: employee rights & corporate responsibility

Corporate Acquisitions: Employment Insights - Episode 3

In this episode, Katie Harris and Natalie Wood discuss the Transfer of Undertakings Protection of Employment Regulations 2006 (TUPE). 

As they speak about TUPE, they expose the strategies essential for a smooth transition during asset sales, and how they can influence deal timelines and potential post-transfer challenges such as dismissals and contractual alterations. The episode addresses the delicate balance of responsibilities between the selling and buying parties. Employers must be meticulous in planning and executing the transfer of employees, ensuring that all legal requirements are met and that the workforce is kept abreast of developments 

Understanding TUPE is crucial for employers and employees alike as it can significantly influence the handling of employment contracts, liabilities, and the overall trajectory of corporate mergers and acquisitions. 

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Chapters

• 0:03 Understanding TUPE in asset sales
• 11:38 Obligations and Pitfalls in Asset Purchase
• 20:36 Understanding TUPE Regulations in Acquisitions

Transcript

 Katie Harris Host 00:03 

Hi, I'm Katie Harris. I'm a Senior Associate Solicitor in Boyes Turner's Employment Team. This series is going to be looking at the different elements of corporate support work that we do as employment lawyers. In our last episode we looked more closely at the employment aspects of asset and share purchases. You'll remember that the key difference between these two types of acquisition from an employment perspective was the application of a piece of legislation called the Transfer of Undertakings Protection of Employment Regulations 2006, otherwise known as TUPE. Tupe applies to asset sales but in most cases will not apply to a share sale. In this episode we're going to focus in on TUPE, how it operates, and consider some of the difficulties and challenges it can pose, both operationally and commercially, when dealing with an asset sale. To help explain more, I've been having a chat with Natalie Wood, Associate Solicitor in our Employment Team. I started by asking her what TUPE is and what it does. 

Natalie WoodHost01:00 

TUPE has been enforced in its current form since April 2006. It implements a piece of European legislation known as the Acquired Rights Directive (ARD), and the purpose of TUPE is to protect employees whether business or part of a business in which they work is sold or transferred. 

Katie HarrisHost01:20 

So that would be, as we discussed in the last podcast, via an asset sale most commonly yes, exactly. So just expanding on that in broad terms, when does it apply then? 

Natalie WoodHost01:34 

So, in high-level terms, there are different types of GP a business transfer and a service provision change. And a service provision change, A business transfer takes place when there is the transfer of an economic entity that's situated in the UK immediately prior to the transfer. In order for TUPE to apply, that economic entity must retain its identity after the transfer. 

Katie HarrisHost01:58 

So what does that look like in practice then, Natalie? Are you able to give an example of that? That all sounds quite complicated. 

Natalie WoodHost02:07 

Yeah, certainly so. I mean, a good example of a business transfer was the sale of part of a motorbike business that I worked on recently. The motorbike business had two parts to it, a service centre and a sales centre. The sales part of the business sold motorbikes and motorbike parts, and the service side obviously undertook servicing and repairs. So let's call the business Motorbike Co. 

02:32 

The buyer bought the servicing part of the business and they acquired all of the equipment used, together with things like the client list, existing customers and supplier contracts and obviously as well, the right to receive payment for services already undertaken. The intention was for the servicing side of the business to carry on as normal after the acquisition, but to run from a different location and under a new name. So Motorbike Co would continue to exist but would only operate as a sales business. The acquisition of the service side of the business was a business transfer under TUPE. The nature of the assets side of the business was a business transfer under TUPE. The nature of the assets that were acquired meant there was a clear and identifiable economic entity, a servicing business, that continued to function in the same way after the transfer and retained its identity as a servicing business despite operating from a different location and under a different name. 

Katie HarrisHost03:25 

So just to stop you there, then, because we've used this analogy, I think, in the last podcast which I loved and I think it was one you introduced, which was this concept of a box of biscuits. So in this case, in this example, you know, we had this company, motorbike Co. Motorbike Co is the box and the biscuits inside it I suppose would have been the, you know, the servicing business and all the assets and and things that went along with that, and the sales center and again all the sort of assets, so the stock and the customer list and things like that that went along with it. And so in in this example, the buyer has bought all of the sales side, so they've bought all of the biscuits or the assets related to that part of the business and that's continued to function in the same way, and so that's then a business transfer. So that's when TUPE applies. 

Natalie WoodHost04:19 

Yes, exactly. 

Katie HarrisHost04:20 

Perfect. So what's the example of a service provision change? And that's the other sort of transfer that you mentioned. 

Natalie WoodHost04:27 

An example in that context could be where a company outsources its IT support services to a third party contractor and we do tend to see that kind of thing a fair amount and this would likely constitute a TUPE transfer under the SPC provisions and any employees who were assigned to carry out IT support services for the company would then transfer to the third party contractor under TUPE. 

Katie HarrisHost04:54 

Right, but that's not sort of a corporate acquisition, so that's not the buying or the sale of a business. 

Natalie WoodHost05:01 

No quite. 

05:06 

That's kind of like outsource services type situation is usually when service provision changes, yeah, where a service stops being provided by one service provider and that is instead carried out by another. 

05:15 

So when GP applies, it will automatically transfer to the buyer all employees that are working in the business that's being transferred, together with their contracts of employment, with some limited exceptions. It also transfers to the buyer liability in respect of employees dismissed by the seller in advance of the transfer. The reason for that dismissal was the transfer. It will also render any dismissal automatically unfair where the reason for it is related to the transfer, unless there is an economic, technical or organisational reason entailing changes in the workforce. And it also transfers any trade union recognition in respect to the transferred employees to the buyer, transfers any collective agreements with trade unions applicable to the transferred employees. It also prohibits any change to terms and conditions of employment of those transferring employees when those changes are made because of the transfer. And, again, unless there is an ETO reason that's our economic, technical or organisational reason for the change requires the provision of information to and, in some cases, consultation with, appropriate representatives of effective employees and, finally, when she applies, it also requires supply of a set of specific statutory information about those transferring employees, which we refer to as employee liability information. 

Katie HarrisHost06:31 

So that's a lot, and you know this is one of the reasons why, you know, when we're dealing with asset purchases from an employee perspective, things can get quite, quite tricky. And and so I know a lot of clients you know would be wondering this you, given that we've got all of this kind of fairly onerous obligations and liabilities that perhaps arise out of TUPE, can we call contract out of it? Is there a way of just, you know, drafting into the terms a clause which says, you know, TUPE doesn't apply to this? I mean, is it possible to contract out of these liabilities at all? 

Natalie WoodHost07:17 

Unfortunately, it's not possible to contract out of TUPE. It does apply automatically by operation of law where certain conditions are met and, unfortunately, whether the buyer or seller wants it to. But in terms of the liability side of it, we do tend to see parties dealing with that aspect in the asset purchase agreement. 

Katie HarrisHost07:41 

Okay, so we can't prevent TUPE from applying, but what we could potentially do is insert some clauses or terms into absolutely purchase agreement to deal with the, you know, financial liabilities of what that could rise out of that got you so taking us into account, then you know, how would we? How do we identify whether TUPE applies to a particular asset purchase or not? 

Natalie WoodHost08:09 

Well, it's a fairly complicated question to answer on a case-by-case basis and it ultimately requires an analysis of many different elements, including the nature of the assets being acquired, the intention of the buyer post-acquisition, such as whether the business will continue to function in the same way after the transfer. Because of the difficulty in identifying whether TUPE applies, together with the significant risks of non-compliance, most buyers and sellers tend to work on the assumption that it will apply unless there is a very clear and strong argument that it won't apply. For example, if only discrete assets are being acquired that could not constitute a business. For example, if a food delivery business is buying cars from a taxi service company. 

Katie HarrisHost08:58 

We've said quite a bit that TUPE only applies to asset purchases and it doesn't apply to the sale of shares. And this is because there's there's no business transfer. When we're acquiring the shares, the business is kind of staying where it is, so that all of the the biscuits are staying within the box. But are there any circumstances in which that might not be the case, so where we might have a share acquisition but TUPE applies? Is that possible? 

Natalie WoodHost09:25 

Yeah, absolutely so. If an asset transfer is carried out prior to a share sale, or if there is an intra-group asset transfer, post-acquisition, which we tend to see quite a lot. So this is where the assets are transferred to another group company after the acquisition, or if there is a post-share sale integration of the business into the wider organization. So that could happen where, for example, a parent company takes over the day-to-day running of its subsidiary businesses to a significant degree. Again, a detailed discussion of these types of cheap transfer is outside the scope of this podcast, other than to say that buyers and sellers need to be alive to the possibility that a TUPE may still occur, even if there is just a share sale. 

Katie HarrisHost10:10 

Yeah, and we've come across this in practice a few times. I mean, you just sort of mentioned that. Are you able to give kind of a practical example of you know, one that we've worked on recently, to illustrate that point? 

Natalie WoodHost10:22 

Yeah, of course. So there was a transaction in the last 12 months where there was a plan, post-acquisition, to integrate the business and assets of the target company into the buyer's existing group structure, and the transfer of the business and assets were due to take place gradually over the next 6 to 12 months period following completion. And although this future TUPE didn't directly impact the share acquisition itself, it was something that has to be borne in mind when considering how to deal with the existing management team, because many of them were due to move on to new fixed-term employment contracts following completion which were due to expire on or around the potential TUPE day, which created a potential risk of automatic, unfair dismissals, which needed to be planned for and mitigated. 

Katie HarrisHost11:10 

So, you know. 

11:12 

So. In other words, even though we might be dealing with what looks like a simple share sale, it's really important to understand the future intention that the buyer has in respect to that business, just in case something like a TUPE might apply further along, because that then can impact perhaps the advice that we're giving on the sale, and particularly with the future plans, with the employees Exactly. So, working on the assumption that TUPE will apply to an asset purchase, then what are the implications of this and I know we sort of touched on them in kind of high level summary, but going into a bit more detail on that, yeah, well, first and foremost is the obligation to inform and also, in many cases, consult with employee representatives. 

Natalie WoodHost11:57 

So liability for failing to comply with these obligations can result in awards for up to 13 weeks uncapped pay for each employee. So it could be potentially substantial risk there. And the requirement to inform and consult is something which must be borne in mind when planning deal timescales, since, if it's required, must be completed in good time before the relevant transfer date. 

Katie HarrisHost12:21 

So when we're talking about the obligation to inform and consult, what is that exactly? 

Natalie WoodHost12:27 

It's the obligation on the employer of any affected employees to provide a certain set of statutory information to representatives of those employees, which is fairly prescriptive and includes information about the fact and date of the proposed transfer, the reasons for it, the legal and economic and social implications of it, and also whether any measures might be taken in relation to affected employees in connection with that transfer. 

Katie HarrisHost12:59 

Okay, and just to be clear, this obligation to provide information or that information you've described, that happens in every case where there is a TUPE transfer, because I know before we sort of said you know there is a separate obligation to inform and a separate obligation to consult. The obligation to inform always arises. The obligation to consult only arises in certain, in some cases. Yeah, let's talk about in a minute, okay. So, looking at the obligation to inform and provide that sort of statutory information, are there any particular pitfalls that you know employers might make at this stage? 

Natalie WoodHost13:35 

Employers tend to overlook what we mean by affected employees, so it doesn't just mean those that are due to transfer, but it can also mean those whose jobs could be affected in some way by the transfer. So if the buyer's existing employees could be affected if their roles or reporting structures are changed to accommodate new transferring employees, that is something that they would need to be informed about. 

Katie HarrisHost14:02 

Right, so it’s important for both buyers and sellers to identify who are the affected employees quite early on. That could be wider than simply that group of employees who are transferring, depending on the impact of that transfer. Yeah, gotcha. So, going back to that requirement to consult what are? In what circumstances does that requirement to consult arise? 

Natalie WoodHost14:28 

Well, only if the buyer or seller anticipates taking measures in relation to affected employees. 

Katie Harris Host14:36 

Right, what measures then? 

Natalie Wood Host 14:39 

Any action, step or arrangement that has an effect on the employees. So it could even be a minor administrative change A common one we tend to come across and I know we have lots of transactions we've worked on together but is change to payroll date. You know, even if by a week or so, you know that is still a measure. To add to that, when consultation is required, it has to take place long enough before a relevant transfer for a meaningful consultation to take place I mean this is deliberately vague. 

15:11 

Yeah, absolutely so. What is long enough will depend on the subject matter of the consultation. There must be a clear dialogue and consultation must also be carried out with a view to seeking the employee's agreement to the measure being proposed. There has to be sufficient time for the employer to explain the reasons for the proposals, receive employee feedback and consider that feedback often a point which is not complied with and also then to provide a response to that. Obviously a more minor change. So, going back to our payroll date example, that is unlikely to prove that contentious and any concerns are likely to be dealt with fairly easily, whereas measures which include more substantial changes to terms of employment and or proposed terminations will require significant consultation which could take weeks, potentially months, if not longer, to reach a conclusion. 

Katie HarrisHost16:09 

And this is a really important point, isn't it? Because you, you know deals that we work on, you know, are often having to work to very sort of specific timelines for commercial reasons, and so you know, identifying early on whether or not consultation is going to be required so whether or not there are we're going, the buyer's going to be taking any measures, and also what the extent of those measures are is really important, because you know if we need to, if the for commercial reasons, you know the, the pressure is on to complete a transaction within a month, but actually the reality is we're planning to make substantial changes to, you know, a large group of employees and we need to enter into consultation. That consultation process could take two or three months to do properly. So then we've got a deal timeframe problem. So, on that note, how should employers go about consulting with employees or employee representatives? 

Natalie WoodHost17:08 

So consultation has to be with employee representatives. Unless there is an existing body already in place or such as a recognised trade union, or if the employer is a micro employer, meaning they've got fewer than 10 employees, then representatives have to be elected through an election process before information and consultation can even commence. So, as you touched on earlier, Katie, this can add considerably to the deal timeline with. While the length of the process will depend on the size of the employer and number of employees involved, in most cases an election process can be carried out within two weeks to a month, and then the consultation process will normally take another month from there. However, with more complex or contentious cases, it can take significantly longer than this and can take many months to complete properly. 

Katie HarrisHost17:59 

So presumably that can be really problematic. We've already got the time that would be needed to consult, and if we're also having to add on to that the time that we may need to undertake an election process, that can be quite tricky when things get a bit time pressured, you know. Are there any other reasons why it can be quite problematic to have to sort of go, you know, go through these steps so far in advance before we might want a deal to complete? 

Natalie WoodHost18:28 

Yeah, so confidentiality is kind of a key one there. So it's fairly common for parties of an acquisition to want to maintain confidentiality around the deal for as long as possible. So there can often be a reluctance to engage in consultation before the deal is at kind of more of an advanced stage. This could also be for commercial reasons, because you know the employers might not want to unsettle the workforce, which you know often these things can. 

Katie HarrisHost18:54 

Is there a way around this? Can buyers and sellers get out of the obligation to inform and consult in any way? 

Natalie WoodHost19:01 

Well, there is an exception to the requirements to inform and consult where there are special circumstances which render it not reasonably practicable for the employer to comply with this obligation. This isn't an absolute excuse, as the employer must still take whatever reasonable steps that it can to comply in circumstances. 

Katie HarrisHost19:23 

And it's not easy for an employer to establish a special circumstances defence, is it? 

Natalie WoodHost19:28 

No, absolutely not. The employer must be able to prove that it was constrained by some unexpected, sudden or unforeseen event or occurrence beyond its control and which was out of the ordinary run of commercial or financial events. 

Katie HarrisHost19:43 

And we had an example recently where we considered if a special circumstance exception would apply. What was that? 

Natalie WoodHost19:52 

So in that circumstance receivership and liquidation. 

Katie HarrisHost19:56 

And you would have thought that a receivership and a liquidation could potentially amount to special circumstances, can it? 

Natalie WoodHost20:02 

If sudden and unexpected, yes, but if it's something the employer should have seen coming, then it can be a little bit more murky to establish a special circumstances defence. 

Katie HarrisHost20:18 

Okay, and I think in the case that we worked on, I think we decided that probably a special circumstance defence might possibly be something we could use, but it was certainly not something we could rely on. And actually, even if we did have a special circumstances defence, we would still have to show that we'd taken whatever steps we could with the time that we had to undertake that consultation. 

Natalie WoodHost20:36 

Whether a small number of employees transferring or in the seller's business, there are ways in which the requirement to elect employee representatives can be reduced or avoided. This can help to significantly reduce the overall length of the information and consultation process and its impact on the deal timetable. 

Katie HarrisHost20:54 

Yeah, and obviously if the buyer and seller go back you know don't envisage taking any measures at all in related to any affected employees then the only thing that they need to do is to provide that information and they can dispense with consultation altogether. So, looking at again the obligation to carry out this consultation, who has that legal responsibility? 

Natalie WoodHost21:16 

It's the employer of the affected employees. In most cases, the responsibility will sit with the seller as the employer of the transferring employees. The buyer's only obligation is to inform the seller of any measures it intends to take in relation to the transferring employees. However, because liability under TUPE is joint and several, meaning both the buyer and seller can be liable for any failures, the buyer may want to have some involvement in the consultation process to make sure it's carried out properly. 

Katie HarrisHost21:45 

Yeah, and that's also a good idea for an employee relations perspective as well, isn't it? Because if you've got employees who are a bit worried about the fact that their employer or their employment is about to transfer, it can often help them to meet the new employer, which can be quite reassuring and help with a smooth transition. 

Natalie WoodHost22:02 

Yes, exactly. 

Katie HarrisHost22:04 

And over what period of time does consultation normally take place? I mean, this is probably the golden question. I think it's one that we get asked by clients quite a lot, isn't it? Particularly when we're under pressure to complete within a certain time frame. 

Natalie WoodHost22:16 

Yes, exactly. I mean. It's very understandable, given the clear 30 or 45 day time scales under required under collective redundancy consultations. But under TUPE there is no set time. The only requirement is that it takes place long enough before completion to enable a consultation to take place. Obviously, if there is no requirement for consultation because there'll be no measures, then in theory the information can be given at any point up to the date of completion. It's therefore crucial to be able to identify early on whether the buyer will need to take any measures in relation to those transferring employees, as this can have such a big impact on deal timeframes. If consultation is required, and also the extent of that consultation, will dictate the length of the process. 

Katie HarrisHost23:00 

Are there any other TUPE complications that employers you know need to be aware of or that parties to an acquisition need to be aware of and we've talked about, obviously, information consultation, which is, you know, can be difficult and onerous. Are there any other things that might be impactful on an acquisition? Are there any other things that might be impactful on an acquisition? 

Natalie WoodHost23:15 

Well, the primary concern is really that TUPE is there to protect employment, so it imposes certain restrictions on the extent to which employees can be dismissed or their contracts changed in the context of a TUPE transfer, and so dismissals that are made before or even after the transfer that occur because of it will be automatically unfair unless there is an economic, technical or organisational reason for that dismissal that entailed changes in the workforce. In most cases this restriction wont cause too many issues in the context of an acquisition, as most dismissals will be by reason of redundancy, which would potentially constitute an economic, technical or organisational reason and then potentially would be permissible. 

Katie HarrisHost24:02 

So this is all very difficult for mostly probably for a buyer of the business who might well want to make changes to the workforce once, once they've acquired the business. But there are certainly things that can be done to address that risk absolutely yes so you know we talked about this kind of economic, technical and organizational reason, which is one way a buyer, could you know, perhaps make changes to contractual terms, or it could terminate contracts, employment immediately. 

24:33 

So I mean a buyer could validly make these changes if they can demonstrate they've got an ETO reason for the change, or of course you know, if they had a reason for making contractual changes that was absolutely nothing to do with TUPE transfer, again, that that's something that could potentially be done, isn't it? Yeah, so with um, with TUPE, then if we've got liability that arises, cheapy perhaps because we've changed terms of conditions or we've terminated employment, we failed to inform and consult who bears the liability for that. Is it? 

Natalie WoodHost25:03 

The buyer could be liable for failures caused by the seller and vice versa. In addition, as all rights, duties and liabilities in relation to the transferring employees transfer automatically to the buyer on completion, the buyer can find themselves liable for any pre-completion acts or failings of the sellers, such as pre-completion dismissals or resignations. 

Katie HarrisHost25:34 

So it's fair to say that both sellers and buyers can be at risk of claims in a TUPE situation. So how do we deal with these risks? 

Natalie WoodHost25:44 

Well, typically, parties can seek to agree indemnities in the asset purchase agreement with the aim of apportioning these risks. So the seller and buyer will both agree to indemnify the other in relation to any respective failure by them to comply with TUPE information and consultation obligations, and the buyer will want to seek indemnification for any pre-completion dismissals or any other failures for which it could be liable. The buyer will also want to seek certainty over what rights and liabilities will be passing to it under TUPE and in respect of which employees. Indemnities and warranties are frequently used to provide certainty for the buyer, such as a warranty that the identity of all transferring employees has been provided, backed up by an indemnity in relation to any individuals who transfer to the buyer unexpectedly. 

Katie HarrisHost26:33 

So that I mean that's all been really, really interesting. Obviously, TUPE is an incredibly complex and you know large area to talk about. There are some changes aren't there on the horizon, Natalie? 

Natalie WoodHost26:46 

Yeah, so one of those changes is to remove the requirement for employers to elect employee representatives. So, for the purposes of TUPE consultations, for businesses with fewer than 50 employees, irrespective of the size of the transfer, and for businesses of any size where the transfer involves the transfer of fewer than 10 employees, and in these situations businesses would be able to consult directly with employees, provided, of course, that there are no existing employee representatives in place. 

Katie HarrisHost27:19 

That would be a massive help, though, wouldn't it? Because we talked about probably one of the biggest complications of TUPE. Aside from the restrictions around what we can do with employees, is this impact potentially on deal timeframes, and the election, or having to go through an election process is a pretty substantial impact. So if that can be removed in any way, that's helpful. I think that kind of wraps up a closer look at TUPE. Thank you very much, Natalie. That has been really informative. 

Natalie WoodHost27:47 

Absolute pleasure. 

Katie HarrisHost27:49 

That was Natalie Wood, Associate Solicitor in our Employment Team. In our next episode, we're going to be talking about the due diligence process and we're going to cover areas which I think will be of real benefit to HR people or managers. Whether you're buying or selling a business, this will give some idea of how to get your ducks in a row, the sorts of things that you might get asked and how to get everything prepared so that you're ready for that process. Just subscribe or follow the podcast and you will be able to listen to the episode as soon as it is available. Thanks and goodbye.